All Forum Posts by: Susan O.

@Susan O. I did something similar to this back in 2005.  Prior to that I was doing a lot of investing in California and saw handwriting on the wall that there was trouble coming.  So I went to Buffalo NY of all places, and bought some property there.  My thinking was that was a market that didn't move much in any direction so there was relative safety there.  Turned out I was right--soon after California dropped 30% to 70%, and my Buffalo property actually went up in value during the same period.

But I caution you to not focus on cap rate as a haven of safety.  First, cap rates and return on investment have little to do with one another (although it is a common misconception).  And second, higher cap rates are usually just that for a reason.

Cap rate is nothing more than a temperature of the market.  Investors recognize strong markets that have a good economic story and are willing to pay higher prices for the same size in-place income stream.  They do this because there is upside potential and a good chance that revenue growth and occupancy levels are sustainable.  

On the other hand, investors tend to pay less for a stream of income if they think that income stream is going to remain stagnant or there is risk that it could decline.  Paying less for that income stream means a higher cap rate just by definition.  But if you think of it that way, perhaps you see higher cap rates as less of a positive and more of a negative.  There is some truth to that, to a point.

So my advice is to focus far less on cap rate and instead look for markets that have a strong economic story.  Markets that have population growth, job growth and income growth.  Those are the places most likely to produce the best overall investment result.  

That said, some of the markets you mentioned on your list are among the top markets in the country right now (and by virtue of that, have low cap rates!).  Those include Orlando, Las Vegas, Jacksonville, Atlanta and to a lesser degree, Houston.  You won't find 7% cap rates in any of those markets for larger multifamily acquisitions of good quality.  I see virtually every marketed deal over 100 units in those markets plus a healthy share of off-market opportunities, and nearly without exception I see most of these trade in the fives.  But the ones we've acquired in these markets have a ton of potential and will very likely outperform assets in weaker markets.

Orlando is one of the strongest markets in the country right now.  A few years back Texas used to dominate the lists of top performing metros.  Now Florida has taken that spot.  Many of the Florida metros are top-ranking cities right now.  

I'm buying in Florida, but focusing mostly on the central and northern FL markets such as Tampa, Orlando, Jacksonville, Cape Coral/Ft. Myers...with practically zero emphasis on south FL (Miami area) mostly because it just feels overbought to me.  I could be wrong, I'm sure it's a great market if you can find something good to buy there and not have the price driven to the moon by the other buyers (something that is starting to happen in Orlando now, too).

Austin is another market that feels overbought and you might also notice that the rent growth there is starting to taper off.  Probably because rents have been pushed about as far as the resident base will tolerate, for a while.  Houston is hit and miss and while oil prices no longer control that market, they do have some influence, and oil prices aren't helping Houston at the moment.

Speaking of pushing rents as far as residents can tolerate--that's a reason why I don't favor California at all.  Rents are pushed to the max, to the point where there is a constant drumbeat of rent control.  And when you look at the ratio of rents to disposable income in California, it seems to leave a lot of reason to invest elsewhere for a while.

@Russell Brazil - totally agree! Especially in this cycle.

@Susan O. - the Cap Rate is a market-driven metric. Essentially, the question goes something like this:

At what rate of return would a reasonably aggressive investor be willing to deploy in this location for this type of an asset? The answer to this question is, in turn, the Cap Rate. So it's essentially a measure of market appetite, which has almost nothing to do with a specific asset, and almost everything to do with the risk assessment of the marketplace.

Thus, if I deem a marketplace to be extremely safe, I should be willing to accept a much lower Cap Rate. It's like the bonds vs. stocks conversation - the higher the safety, the lower the expected return.

That said, we are in a very seasoned cycle right now, which means several things. One - safety is paramount. Go where the jobs and population are growing, and property taxes are low. Go where there are fewer natural disasters and there is no snow (or freezing pipes) - this keeps the insurance costs down.

Two - buy value add. ONLY value-add.

Three - do deploy capital. Some think we are in the 7th, while others say we are in the 9th. But, no one knows how many we will go into the overtime.

In the mid-west I'd only look at 2 markets, Columbus OH and Indianapolis IN, in that order. However, while best of what that part of the country can offer, neither is a growth market.

On balance, I like Phoenix. In fact, I like it so much I moved here from Ohio 2 years back. I buy in Phoenix. Even though the Cap Rate on the way in is about 4.5 - 4.75

Hope this helps!

@Susan O. Market is still hot with a lot of demand for everything, including rentals. Like any real estate investment if the price is right jump on it. It is very hard to find a multifamily come up for sale for a decent price in this area.